HUTCHISON PORT HOLDINGS TRUST 154 NOTES TO THE FINANCIAL STATEMENTS 3 Critical accounting estimates and judgements Note 2 includes a summary of the material accounting policy information used in the preparation of the fi nancial statements. The preparation of fi nancial statements often requires the use of judgements to select specific accounting methods and policies from several acceptable alternatives. Furthermore, significant estimates and assumptions concerning the future may be required in selecting and applying those methods and policies in the fi nancial statements. The Group bases its estimates and judgements on historical experience and various other assumptions that it believes are reasonable under the circumstances. Actual results may diff er from these estimates and judgements under diff erent assumptions or conditions. The following is a review of the more signifi cant assumptions and estimates as well as the accounting policies and methods used in the preparation of the fi nancial statements. (a) Long lived assets The Group has made substantial investments in tangible long-lived assets in its container terminal operating business. Changes in technology or the intended use of these assets may cause the estimated period of use or value of these assets to change. The Group considers its assets impairment accounting policy to be a policy that requires one of the most extensive applications of judgements and estimates by management. Assets that are subject to depreciation are reviewed to determine whether there is any indication that the carrying value of these assets may not be recoverable and have suff ered an impairment loss. If any such indication exists, the recoverable amounts of the assets are estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. Such impairment loss is recognised in the income statement except where the asset is carried at valuation and the impairment loss does not exceed the revaluation surplus for that asset, in which case it is treated as a revaluation decrease and is recognised in other comprehensive income. Management’s judgements are required in the area of asset impairment, particularly in assessing: (1) whether an event has occurred that may indicate that the related asset values may not be recoverable; (2) whether the carrying value of an asset can be supported by the recoverable amount, being the higher of fair value less costs to sell or net present value of future cash fl ows which are estimated based upon the continued use of the asset in the Group; and (3) the appropriate key assumptions to be applied in preparing cash fl ow projections including whether these cash fl ow projections are discounted using an appropriate rate. Changing the assumptions selected by management to determine the level, if any, of impairment, including the discount rates or the growth rate assumptions in the cash fl ow projections, could materially aff ect the net present value used in the impairment test and as a result aff ect the Group’s fi nancial condition and results of operations. If there is a significant adverse change in the projected performance and resulting future cash flow projections, it may be necessary to take an impairment charge to the income statement. (b) Goodwill For the purposes of impairment tests, the recoverable amount of goodwill is determined based on value-inuse calculations. The value-in-use calculations primarily use cash fl ow projections based on fi nancial projections approved by management. There are a number of assumptions and estimates involved for the preparation of cash fl ow projections. The key assumptions adopted in the value-in-use calculations are based on management’s best estimates, past experience and new business developments. Changes to key assumptions can aff ect signifi cantly the results of the impairment tests. Key assumptions are made with respect to the expected growth in revenues and cost of services rendered, timing of future capital expenditures, terminal growth rates and selection of discount rate, which approximately refl ect the risks involved. The growth in revenues will be aff ected by the growth in both the volume of containers handled, tariff and new business developments. The volume of containers handled will be impacted by economic and global market conditions, structural changes within the shipping line industry and infl uenced by the performance and growth of regional and international trading economies. If key export markets for local exporters experience an economic downturn or recession, export volumes may decrease. The growth of tariff depends on the Group’s overall competitiveness, which is determined by a number of factors, such as geographical reach and connectivity, operating effi ciency, berth availability, mega vessel handling capability, technology off erings, transportation and logistics network and ancillary services and facilities.
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